Activision Blizzard Merger Case Study Analysis Essay

The Activision Blizzard Merger In December of 2007 the merger of Activision and Blizzard was announced. Blizzard Entertainment, one of four divisions of Vivendi games, was the key ingredient for synergy between the two firms. First, an introduction to the video game software industry is pertinent. This will be followed by some discussion regarding the major trends and major players in the industry. Second, some insight will be provided on the merging companies, Activision and Blizzard. Third, the potential value of the merger will be explored, along with some analysis of the partnership.

Lastly, I will give my personal views of the merger itself. The Industry, domestically the video game software industry was worth $9. 5 Billion in 2007, with expected growth to be $12. 5 Billion in 2011. Projections for growth were even larger in international markets, with emphasis on Asian countries. There are two basic forms of hardware that can be used to play a video game a computer, or a gaming console, like an Xbox. Some hardware makers also make their own software, but the most successful games usually come from developers, or third-party software manufacturers.

Developers specialize in the development of the games itself, leaving the sales and distribution to publishers. Historically the two branches of the value chain were separate, but as the industry evolved and as we dissect the case study, the economic efficiencies to be gained by combining both efforts under one company will be realized. Some problems with independent software development include the potential risk for a game, or piece of software to be a failure, and not sell.

This puts enormous pressure on the firm to develop successful games, because a lackluster game could lead to economic loss if the development costs prove to be more than the revenues. Other problems include finding the right partnership between developers and publishers, as the two companies’ goals may not always align. Also, the cyclical nature of video game development may hinder profitability. The revenue model for the video game software industry has changed in recent years with the integration of the internet and gaming.

After the initial purchase of the software, consumers may go online and choose to buy additional features that will enhance their gaming experience. Moreover, some PC games and some consoles require subscriptions which provide firms with reoccurring revenues. Another recent source of revenue to the industry has been the increase in active users, mainly females and older adults with more disposable income. Lastly, since the internet has connected individual gamers to one another, a network effect is in play. Meaning that the more people that are connected, the more valuable the connection becomes.

In this case the connection is through a certain game, like World of Warcraft. Many firms are competing to produce software for the video game industry, THQ, Electronic Arts, and Take-Two interactive are Activision Blizzard’s strongest competitors. THQ, while a large company, is not all that dangerous to Activision Blizzard. The demographics the companies appeal to are fairly different age wise and geographically. THQ focuses on a young audience, and they failed to gather support in Asia, a market where Activision Blizzard looks to exploit.

Electronic Arts, maker of many professional sports related video game titles and Take-Two, publisher of arguably one of the best console game series ever, Grand Theft Auto, are the largest threat to Activision Blizzard. Electronic Arts has exclusive rights to the NFL, which makes its Madden series extremely profitable, especially since EA releases a new version every year. EA also uses ad space in its games to create additional revenue. Besides those key success factors, EA distributes games developed and published by other companies.

What makes these two companies so threatening to Activision Blizzard is EA’s attempt to merge with TTWO. Luckily for Activision Blizzard, the potential take-over, or unfriendly acquisition of TTWO by EA never occurred. Activision Pre-merger: Activision was a leading developer and publisher of video game software for consoles. Its top titles include Guitar Hero, Tony Hawk, and Call of Duty, all of which have multiple games in their series. The company itself was moderately vertically integrated, with ownership of some development, publishing, and distribution activities.

Its strengths lie in its growth strategies; partnerships allowed the firm to exclusive rights to certain brands. Other strengths include leading game titles for multiple platforms, hit sequels that are less capital intensive to develop, a stringent “green light” process for quality control, ability for online game play, and divisions in over a dozen countries. Weaknesses include lack of existence in foreign markets, lack of PC software development techniques, and the fact that licensed content is vulnerable to competition. The opportunities available are sequels to already established titles, growth in industry, and uture partnerships based on their good reputation with previous alliances. Threats include competition from other software developers like THQ and Take-Two, the cyclical nature of releases, and the reliance on game consoles for use of software. Blizzard Pre-Merger: Strengths for the Company include top performing titles manufactured for use on computers, reoccurring revenues based on subscriptions, and a presence in the hard to penetrate Asian market. Weaknesses include Vivendi’s three poor performing divisions, the absence of titles for game consoles, and high development costs.

Opportunities lie in their enormous customer base, growth of international markets, and merchandise sales stemming from existing products. Threats include free online gaming, competitors such as EA, and government regulation of age of use. The potential value of this merger, in my opinion, is great. The case infers that the video game software industry is not a thinly traded market, evidence for that lies in the vast number of acquisitions Activision had made prior to the merger with Blizzard, and also the existence of many independent developers who strive to partner or merge with publishers.

The case does state whether there were any other firms vying to merge with either Activision or Blizzard, and since two of the main competitors were in an acquisition struggle themselves it seems apparent that “the market for corporate control” was operating imperfectly. By that I mean no other firms were competing to merge with Activision or Blizzard. This leads me to believe that besides the existence of free cash flow, Activision and Blizzard saw an opportunity to make above-normal profits. In regards to the merger itself, the category under which the FTC would place the merger of Activision and Blizzard is debatable.

While most would agree that these companies are two software manufacturers horizontally integrating; a vertical merger, product extension merger, or market extension merger could all be argued; especially to avoid antitrust legislation. A vertical merger can be argued, because new distributions networks and customers are being acquired by both firms. A product extension merger is a possibility because complementary products are being added; a subscription based company [Blizzard] is being combined with a company who relies on licensed content for revenue [Activision].

Also the fact one entity specializes in PC games while the other specializes in console games adds support to this classification. Furthermore, a market extension merger can be argued because a French owned company, whom already has a footprint in Asia, is merging with an American company, in part to exploit that growing market. Michael Lubatkin would be ecstatic with this merger, as it appears that all three of his potential sources of strategic relatedness are fulfilled with the Activision Blizzard merger. Technical Economies, while inputs remain the same, quality, if not also quantity should increase.

The inevitable knowledge spillover between the firms will lead to innovative and better quality games, and ideally more new releases. Besides connected production efforts, marketing and distribution will likely realize new efficiencies because of the greater scale. Pecuniary Economies, Blizzard already posses this ability with it’s not only rare, but very hard to imitate game World of WarCraft. With over 10 million subscribers and 62% market share Blizzard has a lot of leverage on how much they charge their customers, and the addition of Activision will only increase the ability to set the price.

Diversification Economies, the strongest of the three sources, deals with lowering the firms risk relative to its performance. The merger of the two companies adds stability in so many ways. The cyclical nature of development and release will be leveled due to more titles being released by the same company, instead of by two separate entities. Activision Blizzard’s revenue will be more consistent, with a steady inflow of cash from subscriptions, and the staggering of new releases throughout the year. Also the same brand now has market presence in almost every major genre of video game.

Lastly, profitability for the company is not dependent on one title, like it can be for independent developers. The diversification is so strong in fact, more risks can be undertaken. By this I mean larger more complicated projects with higher potential returns can be invested in since revenue will be more reliable. The merger has my support because I view it as having all the right motivations. From the case it appears that Activision Blizzard is not just trying to flex its economic power. Sure it’s possible this merger is all about gaining market share and dominating an industry.

It is also possible that the firm will not receive any above-normal profits, and/or it did just have a bunch of cash lying around with no better alternative than to acquire a competitor as to seek competitive parity. Regardless, I view this merger as a win for the consumer. I truly believe the merger of these two companies will lead to some of the most creative and fun video game software to date. Of course Activision Blizzard will be profiting from the sales of its products and services, but it is the consumers who will receive the most satisfaction.